Multi-billion losses expected from Russia sanctions

EU diplomats on Monday (28 July) are to pour over the legal texts drafted by the EU commission for imposing sectoral economic sanctions on Russia for its role in the Ukrainian conflict. The sanctions are expected to be approved on Tuesday.

According to an EU source familiar with the legal texts, the economic effect of the sanctions will hurt the Russian economy by €23 billion this year (1.5% of its GDP) and €75 billion in 2015 (4.8% of its GDP).

The Economist meanwhile has calculated that the pain Russian firms will suffer from these sanctions could go up to one trillion US dollars (€744bn).

But the EU will also be hurt by the capital markets restrictions and trade bans for defence, high technology and goods that can be used both for military and defence purposes.

The EU commission expects the EU to lose €40 billion (0.3% of GDP) this year and €50bn in 2015 - the equivalent of 0.4 percent of the EU GDP - as Russia is expected to retaliate with trade bans of its own against EU countries, the source said.

This has already caused concern in southern member states - notably Russia-friendly Italy - where economic growth is meagre and recession may kick in again due to the Russian sanctions regime.

At a meeting of EU ambassadors last week, the southern countries called on the EU commission to take into account the sanctions fallout when it evaluates how they stick to deficit and debt rules.

Germany, who so far was reluctant to endorse wide-ranging economic sanctions, is bracing itself for the fallout, too.

German foreign minister Frank-Walter Steinmeier told Sueddeutsche Zeitung over the weekend that "after the death of 300 innocent people" and the "undignified actions" of pro-Russian rebels believed responsible for shooting down the MH17 plane, Russia "gave no other option" than to impose economic sanctions.

He told another paper, Wirtschaftswoche, that the German economy will suffer only to a limited degree from these sanctions.

But the Committee on eastern European Economic Relations, a German business lobby representing firms active in Russia, has estimated that the sanctions would threaten 350,000 German jobs that depend directly on German-Russian trade, which totals €80bn a year.

The head of this committee, Eckard Cordes, last week however endorsed the stepping up of sanctions, even if it will hurt the German economy.

For its part, Russia has given no signs of wanting to change course over the threat of broader economic sanctions.

"The current sanctions will not have a macroeconomic effect, it is a problem for specific companies," said senior Kremlin advisor Andrei Belousov, quoted by Russian newswires.

The Russian economy expanded by 1.3 percent last year, with the Washington-based International Monetary Fund projecting a much lower 0.3 percent growth this year due to the sanctions.

But Wolfgang Munchau, a German columnist for the Financial Times, warned of the near-impossibility to accurately predict the fallout of economic sanctions.

"Forecasters have a hard time putting shocks – including sanctions – that are hard to measure into their models. We know the large-scale economic forecasting models used by international institutions perform badly during and after financial crises. In a situation like this, they are hopeless," he wrote.

"The correct answer on the question of Russian growth is not “0.2 per cent” or some other number. It is “Don’t know”," Munchau added.

Another thing to consider is Russian resilience to economic hardships.

Philipp Missfelder, an expert on foreign relations from Angela Merkel's Christian Democrats, said sanctions are no ultimate solution.

"Sanctions cannot replace a political solution. Russia has the potential to endure them for a long time and to tighten its belt. We should therefore not believe that sanctions are a panacea," Missfelder told Deutsche Welle.